macro tutorials.pdf

University of the Witwatersrand

School of Economic and Business Sciences

Economics 1B (ECON1009)

Macroeconomics Tutorial Program: 2012

Please refer to the Economics 1 Handbook for notes relating to tutorials

First Semester: Teaching Blocks 1 & 2

Tutorial Co-ordination

If you have questions about the economics 1 tutorial programme, speak to your tutor or

contact the Economics 1 head tutor, Mr A. Jardine. His office is room 234, on the 2nd

floor

of the New Commerce Building (NCB), email: [email protected]

If you have any issues with the tutor or the head tutor, you can contact the tutor coordinator

of the School of Economic and Business Sciences, Mr M. Dhlamini. His office is room 234,

on the 2nd

floor of the New Commerce Building (NCB), email: [email protected]

Tutorials

Tutorials are a vital component of the course. When you write tests and examinations (see

below), the questions you will be expected to answer will be similar in nature to those in the

tutorials. It is essential, therefore, to prepare tutorials thoroughly and revise them in

preparation for tests and examinations. You are required to prepare written solutions to each

tutorial question before the tutorial class. Your tutor will check that you have done this, and

will, from time to time, take in your written tutorials so that s/he can review the progress of

the tutorial group.

Under no circumstances should you arrive at tutorials expecting the tutor to give full

answers with no class participation. The tutors have been instructed NOT to hand out

model answers to tutorial questions. It is up to you to use the tutorials to test your own

understanding and to get feedback on your answers to the tutorial questions!

In order to participate meaningfully in tutorials, you need to come to each tutorial fully

prepared. You should adopt the following approach.

Read through the tutorial to see which aspects of the course are covered.

Study these sections as though you were preparing for a test or examination.

Attempt each question in the tutorial under examination conditions, i.e. write out your

responses without referring to your notes or book.

Where there are questions which you have not been able to do or you feel your answer is

inadequate, consult your notes or book and use these to help you. When your tutor asks

you for your answer to a tutorial question, you should be able to give a good explanation

of the answer to the whole class.

If you still feel unsure about your answer, identify precisely why you think there is a

problem. Your tutor will then be in a much better position to help you to understand

specific sections of the work.

Tutorials are an opportunity for you to discuss the course more broadly with the rest of the

class. The tutor is there to facilitate this discussion and explain particular aspects of the

work. As there is unlikely to be sufficient time in each tutorial to cover all the tutorial

questions, you need to identify the areas which you find difficult and use the opportunity to

discuss these with the class and the tutor.

Thorough preparation is your key to doing well in this course. You need to get as much

practice as you can in actively doing economics yourself. Passively watching the

lecturer or tutor do economics for you will not provide you with a particularly

rewarding learning experience.

COURSE OUTLINE

The chapter numbers given below refer to the 7th edition of Economics by Parkin, Powell

and Matthews. The dates provide a guideline only: some groups may run ahead of schedule,

while others may fall behind. Please consult the notice board for any changes.

1ST

SEMESTER: MACROECONOMICS: (ECON1009 repeat students)

Block 1

Week & Date Topic Chapter

Reference

Homework

Tutorial work

Tests

Week 1

13 - 17 Feb A first look at

macroeconomics

Measuring GDP

Ch 20

Ch 21

Read ch20, 21 & 22

Week 2

20 - 24 Feb Measuring GDP (cont.)

Monitoring jobs and the price

level

Ch 21

Ch 22

Read ch25

Ignite tut 1 submission

(ch20,21&22)

Week 3

27 Feb - 2 Mar The Keynesian Model

“Mathematical Note”

(Short-run aggregate demand)

Ch 25+app.

(excl. pgs

580-581)

Read ch24

Tutor consultation (tut 1)

Ignite tut 2 submission (ch25)

Week 4

5- 9 Mar The Classical model

(Long-run aggregate supply)

Essay skills

Ch 24 Read ch23


Ignite tut 3 hand-in (ch24)

Week 5

12 - 16 Mar

Aggregate supply and

aggregate demand

Ch 23 Read ch26



Week 6

19 - 23 Mar

(4 days)

Fiscal policy

Test prep.

Ch 26 Test prep.



Week 7 26 – 30 Mar

Revision/Review/Catch-up N/A Read ch27 TEST 1 (Ch 20-25)

(Tues 27th March,17h15)

31 Mar – 9 Apr: Study Break

Block 2

Week & Date Topic Chapter

Reference

Homework

Tutorial work

Tests

Week 8

9 - 13 Apr

(4 days)

Fiscal policy recap.

Money and banking

Ch 26

Ch 27

Read ch28



Week 9

16 - 20 April

Monetary policy Ch 28 Read ch29



Week 10

23 - 27 Apr

(4 days)

Fiscal and monetary

interactions

Ch 29 Read ch12



Week 11

30 May - 4 Jun

(4 days)

The ISLM model

Inflation

Ch 29 app.

Ch 30

Read ch14


Ignite tut 9 submission

(ch29 app. & ch30)

Week 12

7 - 11 May International finance

Test prep

Ch 33 Test prep


Ignite tut10 submission

(ch30&33)

Week 13

14 - 18 May Revision/Review/Catch-up N/A Tutor consultation (tut 10)

TEST 2 (Ch 20-30)

(Tues 13th May,17h15)

Week 14

21 - 25 May Exam prep Ch 20-33

(excl. Ch

31 & 32)

Exam prep

28 May – 22 June: Exams

23 June – 15 July: Winter Vac

Macro tutorial 1 Chapters 20, 21 & 22

Written Question 1

a) Real GDP is used to compare economic welfare over time and across countries. List and

discuss three limitations of real GDP as a measure of the above.

b) Briefly describe the difference between nominal and real GDP.

Written question 2

There are two approaches to measuring the unemployment rate in South Africa: the narrow

approach and the broad approach. The narrow approach is the one outlined in the Parkin

textbook. The narrow approach treats discouraged workers* as economically inactive and

thus not part of the workforce, whereas the broad approach includes discouraged workers in

the workforce. Which measure do you think is more appropriate for South Africa and why?

When answering this question provide 2 reasons why the narrow approach may be better and

2 reasons why the broad approach may be better. Then provide 2 disadvantages of using the

narrow approach and 2 disadvantages of using the broad approach.

* Discouraged workers are people who have lost hope of finding a job and so have stopped

looking for one.

Written Question 3

Define natural unemployment and full employment.

Use the following table to answer Written Question 4 and MCQs 1, 2 and 3

Year 2000 2001 2002 2003 2004

Potential GDP 1200 1400 1600 1800 2000

Actual GDP 1200 1500 1600 1700 2000

Natural rate of Unemployment 25% 25% 25% 25% 25%

Written Question 4

Based on the table above, draw a diagram of Fantasyland’s actual real GDP and potential real

GDP. On the horizontal axes show the years (Time) and on the vertical axes show actual and

potential GDP.

MCQ 1

In which year does Fantasyland experience an Okun gap?

A. 2000

B. 2001

C. 2002

D. 2003

E. 2004

MCQ 2

Okun’s gap is usually quantified using “Okun’s Law” which states that for every 1% that the

unemployment rate exceeds the natural rate of unemployment, real GDP is roughly 2% lower

than potential GDP.

Based on Okun’s law what is the actual unemployment rate in Fantasyland for 2003?

A. 0%

B. 21.43%

C. 24.1%

D. 25.69%

E. 27.78%

MCQ 3

Assume that Fantasyland has a working age population (i.e. aged between 15 and 65) of 35

million. Of these, 13.7 million are employed while 8.1 are unemployed. What is the

unemployment rate?

A. 23.14%

B. 37.16%

C. 39.14%

D. 59.12%

E. 62.23%

MCQ 4

In 1980, the nominal value of GDP was R15400 million, while in 2000, the nominal value of

GDP was R17690 million. Using 1970 as the base year (i.e GDP deflator of 1970 = 100), the

GDP deflator of 1980 was 136 and the GDP deflator of 2000 was 162. Using 1970s prices,

we can say that real GDP between 1980 and 2000 has:

A. Increased by approximately R2290 million

B. Decreased by approximately R400 million

C. Decreased by approximately R 2300 million

D. Increased by approximately R400 million

E. Cannot be answered with the given information

MCQ 5

When economists speak of full-employment they mean that:

(i) everyone who wants a job is employed

(ii) there is still some frictional unemployment

(iii) there is still some structural unemployment

(iv) there is no cyclical unemployment

A. only (i) is correct

B. only (i) and (iv) are correct

C. only (ii) and (iii) are correct

D. only (ii), (iii) and (iv) are correct

E. only (i), (ii) and (iii) are correct

Macro tutorial 2 Chapter 25

Written question 1

The following information refers to an open-mixed economy. Suppose that initially the

government neither taxes nor has any expenditure on domestic output. Assume fixed prices.

Except for the marginal propensity to consume, all figures are in currency units.

C = 150 + 0.75Y

Ig = 125

G = 0 and T = 0

X = 80

M = 205

where C is consumption, Y is real GDP, Ig is planned investment (gross), X is exports, M is

imports, G is government spending and T is the lump-sum tax.

(i) Derive an equation for aggregate expenditure (AE) as a function of real GDP (Y).

(ii) Using your equation from question (i), calculate AE for each R100 increase of GDP

(starting with no real output, i.e. GDP=0, up to GDP = R1000) and draw the

Aggregate Expenditure model. (Hint: use R100 steps for both axes and copy the table

below into your workbook and fill it in).

(iii) Suppose that exports decrease to X = R75 and imports increase to M = 275. Draw the

new aggregate expenditure function in the diagram and briefly explain (in less than

1/3 of a page) how equilibrium is re-established in the economy.

Y 0 100 200 300 400 500 600 700 800 900 1000

AE1(Q1:ii)

Y 0 100 200 300 400 500 600 700 800 900 1000

AE2(Q1:iii)

MCQ 1

Using your answers to (ii), what is the equilibrium value of real GDP (Y) using the short-run

aggregate expenditure model?

A. R300

B. R400

C. R500

D. R600

E. R700

MCQ 2 Using the short-run aggregate expenditure model and your answer to (iii), what is the new

equilibrium value of real GDP (Y)?

A. R300

B. R400

C. R500

D. R600

E. R700

MCQ 3 Suppose that the economy is at the equilibrium calculated in MCQ 2 and that full-

employment (i.e. potential) GDP is R1000. What is the value of the GDP gap?

A. -R300

B. -R400

C. -R500

D. -R600

E. -R700

MCQ 4 Assume that there was an initial increase in investment spending of R1000 and that the MPC

is equal to 0.8. Also assume that imports and taxation are independent of real GDP (Y).

Which of the following statements is/are true?

(i) the multiplier is 4

(ii) after the initial spending of R1000, R200 is saved by the household that

received the R1000 as income

(iii) the total change in GDP resulting from the initial R1000 change in spending is

R5000

(iv) the marginal propensity to save is 20% of disposable income

A. only (i) is correct

B. only (ii) and (iii) are correct

C. only (i) and (iv) are correct


E. (i), (ii), (iii) and (iv) are correct

MCQ 5 Assume a linear consumption schedule where a > 0 (a = autonomous consumption). When

the disposable income increases then:

A. the marginal propensity to consume increases

B. the marginal propensity to save increases

C. the average propensity to consume increases

D. the average propensity to save increases

E. the average propensity to consume remains constant


Written question 1

Suppose the SA government increases spending on education. Using the classical (long run)

model and diagrams of the labour market and production function, illustrate the effects such a

policy may have. Your explanation should include 1/3 of a page of written explanation.

(Hint: Explain the process whereby this policy may affect GDP.)

Written question 2

Using the classical model, illustrate (using diagrams) and briefly (less than 1/3 of a page)

discuss 2 other possible reasons for high unemployment in SA and the consequences of high

unemployment to South Africa’s economy.

MCQ 1

The classical model suggests that South Africa’s potential GDP can be increased from two

sources: increased productivity and greater resource endowment. In the classical framework,

which of these activities can bring about economic growth?

(i) An increase in the amount of physical capital available

(ii) Closing down schools

(iii) Chasing away farmers

(iv) Immigration of skilled Zimbabwean farm workers into South Africa

A. Only (i) is correct.

B. Only (i) and (iv) are correct.

C. Only (ii) and (iii) are correct.

D. Only (iii) and (iv) are correct.

E. Only (i) and (iii) are correct.

MCQ 2

Flexibility in real wages determines the slope of the:

A. long run supply curve of labour

B. short run aggregate demand curve

C. long run aggregate supply curve

D. short run aggregate supply curve

E. long run aggregate demand curve

MCQ 3

Improvements in the South African education system will result in, ceteris paribus:

(i) an upward shift of the production function.

(ii) a movement along the labour supply curve.

(iii) an increase in the marginal product of labour and the labour demand curve

will shift to the right.

(iv) real wages increasing.

(v) the natural rate of unemployment decreasing.

A. Only (i), (ii) and (iv) are correct.

B. Only (iii), and (iv) are correct.

C. Only (i), (ii), (iv) and (v) are correct.

D. Only (iii), (iv) and (v) are correct.

E. (i), (ii), (iii), (iv) and (v) are correct.

MCQ 4

South Africa suffers from unusually high unemployment – officially about 25%. One

possible reason is the presence of a minimum wage. Minimum wage can result in

unemployment above the natural rate when (Hint: remember the work covered chs 6 and 17):

A. the quantity of labour supplied is greater than the quantity of labour demanded and

the minimum wage is not binding.

B. the minimum wage is set below the full employment equilibrium price level.

C. the quantity of labour supplied is greater than the quantity of labour demanded and

the minimum wage is binding.

D. the quantity of labour demanded is greater than the quantity of labour supplied and

the minimum wage is not binding.

E. none of the above

MCQ 5

Use this figure, which illustrates the classical model labour market, to answer the following

question. The original supply and demand curves are denoted S0 and D0 respectively. The

letter P in parentheses indicates the price level.

Consider the following statements:

(i) The quantity of labour demanded varies inversely with the money wage rate

(ii) When the demand for labour shifts from D0 to D1, this is an indication that the

general price level has declined.

(iii) A movement from point “a” to point “b” indicates an increase in the money

wage rate.

(iv) A movement from point “a” to point “b” represents an increase in real wages.

(v) The movement from point “a” to point “b” shows that, as a result of an

increase in the real wage rate, firms decide to hire fewer workers and to

produce less output.

Which of the following options is/are correct?

A. Only (ii),(iii) and (iv) are correct

B. Only (i), (iii) and (v) are correct

C. Only (i) and (v) are correct

D. Only (i) and (iii) are correct

E. Only (i) is correct

Money wage rate

b

a

S1 (P=150)

S0 (P=100)

D1 (P=150)

D0 (P=100)

0L Full Employment Labour

Macro tutorial 4 Chapters 23

Written question 1

Austerity Plans in Europe may cause more harm than good

In May many European countries brought in measures to reduce public deficits, reassure

the markets and stop the fall of the euro. These measures were encouraged by the European

Commission and the International Monetary Fund. Both entities wanted to reassure the

markets about the value of the euro and the capacity of some European countries to pay back

their debt.

Ireland was the first to bring in austerity measures. In 2009 Dublin adopted two plans to cut

the public deficit to 11.5% of GDP in 2010, after it reached 14.3% in 2009. At the beginning

of May Greece adopted a plan to reduce its public deficit (14% of GDP last year) and to bring

it back under the European threshold of 3%. The Greek government said it would try to

achieve this before 2014. This massive austerity plan combines higher taxes with lower

salaries in the public sector, lower social welfare, retirement reforms and labour market

reforms. Portugal, Spain, and Italy have brought in cost-cutting measures, and others, like

France and Germany, are likely to follow suit. Non-eurozone countries like the UK,

Denmark and Romania have recently announced that severe austerity treatment is in the

pipeline.

These measures were intended to reassure the world about the health of the European

economy, but have started to raise worries. Many of these European countries are in a

recession and unemployment rates in these countries continue to increase. Economists

worry that setting up too many austerity plans at the same time may halt economic

recovery in Europe.

Reference

Denous, W. (2010, June 5). Austerity Plans In Europe May Cause More Harm Than Good .

Retrieved August 2011, from The Beginner: http://www.thebeginner.eu/all-in-finance/228-

austerity-plans-in-europe-may-cause-more-harm-than-good

Answer the following question: With reference to the Keynesian model of aggregate

expenditure as well as the theories of aggregate demand and both long- and short-run

aggregate supply, clearly explain how austerity measures can “halt economic recovery” and

lead to an increase in unemployment. Your explanation should include diagrams and about a

page of written explanation.

MCQ 1

Complete the following statement: At below full-employment equilibrium, ________ real

GDP exceeds ________ real GDP and there is a __________ gap. This can be cause by a

_________ shock to aggregate demand or aggregate supply.

A. actual, potential, inflationary, positive.

B. potential, actual, inflationary, positive.

C. potential, actual, recessionary, positive.

D. potential, actual, recessionary, negative.

E. actual, potential, recessionary, negative.

MCQ 2

Which of the following is/are correct in the classical model:

(i) A government budget deficit can be financed by purchasing bonds in the

loanable funds market

(ii) The short run aggregate supply curve is upward sloping because of the

assumption that real wages do not adjust fully to changes in prices

(iii) In the long run, government can increase potential GDP by increasing

government spending

(iv) The nominal interest rate is approximately the real interest rate plus the

inflation rate

A. (i) only

B. (i) and (iii) only

C. (ii) and (iii) only

D. (ii) and (iv) only

E. (ii), (iii) and (iv) only

MCQ 3

Which of the following statements regarding the short-run AD-AS model is correct?

(i) A recessionary gap occurs when equilibrium real GDP is greater than the full-

employment level of real GDP

(ii) If an economy is originally at full employment, an increase in the real interest

rate will result in the economy moving to a below full-employment

equilibrium.

(iii) If an economy is at an equilibrium real GDP level that is above full-

employment, an increase in the nominal wage rate will result in an increase in

the price level.

(iv) If an economy is at an equilibrium real GDP level that is below-full

employment, the appreciation in the currency of that economy could result in

it recovering towards full employment.

A. Only (i) and (iii) are correct.

B. Only (ii) and (iii) are correct.

C. Only (iii) and (iv) are correct.

D. Only (ii),(iii) and (iv) are correct.

E. Only (i), (iii) and (iv) are correct.

MCQ 4

If we are at the natural rate of unemployment, an increase in aggregate demand will lower

unemployment in the short-run:

A. regardless of workers' price rise estimate

B. if workers overestimate the consequent price rise

C. if workers underestimate the consequent price rise

D. if workers perfectly anticipate the consequent price rise

E. None of the above

MCQ 5

Which of the following statements is/are correct?

(i) Aggregate demand does not influence potential real GDP.

(ii) An increase in the price of domestic currency in the foreign exchange market

increases aggregate demand.

(iii) Advances in technology shift the long-run aggregate supply schedule only.

(iv) The relative price of inputs remains constant in the long run.

(v) An increase in expected inflation accompanied by an advance in technology

will have an ambiguous effect on real GDP in the short run.

A. Only (ii) and (iii) are correct.

B. Only (iii) and (iv) are correct

C. Only (iii) and (v) are correct

D. Only (v) is correct.

E. Only (i) is correct.


Written Question 1

a) Describe (in words) the change in aggregate supply that would result from each of the

following changes in determinants ceteris paribus. (i) A rise in the average price of

inputs; (ii) An increase in worker productivity; (iii) Government antipollution

regulations become stricter; (iv) A new subsidy program is enacted for new business

investment in productive equipment; (v) Energy prices decline.

b) What determines the equilibrium price level and level of real domestic output in the

aggregate demand–aggregate supply model (1 paragraph)?

c) What happens to bring the AD–AS system back into equilibrium when prices are (i)

below and (ii) above the equilibrium level (1 paragraph each)?

MCQ 1

Automatic stabilizers ensure that:

A. the government budget is always balanced

B. tax structure automatically eases the tax burden during recessions and increases the tax

burden during recoveries

C. tax structure automatically decreases government spending during recessions and

increases the spending during peaks

D. tax revenues change inversely with changes in GDP

E. the government does not overspend its budget

MCQ 2

Which of the following tools can the South African Government use to pursue an

expansionary fiscal policy?

(i) Selling bonds to the public

(ii) Increase government spending

(iii) Decrease taxes

(iv) Increase taxes

A. only (i) and (iv) are correct


C. only (i), (ii) and (iii) are correct



MCQ 3

Assume that the government pursues a contractionary fiscal policy to fight inflationary

pressure in the economy. Which of the following are potential outcomes?

(i) Aggregate demand will decrease due to higher interest rates.

(ii) Interest sensitive expenditure increases and offsets some of the contractionary

fiscal policy objectives.

(iii) Exports decrease due to an exchange rate appreciation.

(iv) Imports decrease due to an exchange rate depreciation.

A. only (i) and (iii) are correct


C. only (ii) and (iv) are correct

D. only (i), (ii) and (iii) are correct

E. only (ii), (iii) and (iv) are correct

MCQ 4

In the long run and when starting from a position of full employment:

A. an expansionary fiscal policy will result in an increase in the equilibrium level of real

GDP with no change to the equilibrium price level.

B. a contractionary monetary policy will result in an decrease in the equilibrium level of

real GDP and an increase in the equilibrium price.

C. an expansionary fiscal policy will result in no change in the equilibrium level of real

GDP and an increase in the equilibrium price level.

D. a contractionary monetary policy will result in no change in the equilibrium level of

real GDP and an increase in the equilibrium price level.

E. an expansionary monetary policy will result in an increase in the equilibrium level of

real GDP and a decrease in the equilibrium price.

MCQ 5

A simultaneous and equal increase in government spending and taxes will:

A. have no impact on GDP

B. help to relieve an inflationary gap

C. increase GDP

D. decrease GDP

E. none of the above is/are correct


Written question 1 “The main purpose of required reserves is to promote bank liquidity and protect depositors.”

Evaluate the statement above – Do you agree or disagree with the statement and give reasons

for you answer. Your explanation should include 1/3 of a page of written explanation.

Written question 2 Why are reserves listed in the assets column of a bank’s balance sheet (1 paragraph)?

MCQ 1

Initially, all commercial banks in South Africa have zero excess reserves. The Reserve Bank

then buys securities to the value of R200 000 from ABSA. In addition, the desired reserve

ratio of all banks is 8% and the currency drainage ratio is 60%. Which of the following is/are

correct? (All values to be rounded off to two decimal places)

(i) The intial increase in the monetary base is R 120 000

(ii) R 75 000 is drained off as currency

(iii) Immediately after the purchase, the banking system will have excess reserves of

R 184 000

(iv) The total amount of money created by the entire banking system is R 470 000

A. Only (i) and (ii) are correct.

B. Only (i), (ii) and (iii) are correct.

C. Only (ii), (iii) and (iv) are correct.

D. Only (ii) and (iv) are correct.

E. Only (i), (iii) and (iv) are correct.

MCQ 2

Use the following diagram of the money market to answer the question that follows. Assume

that money supply is independent of the interest rate (i.e. money supply is vertical). Assume

that the initial equilibrium in the money market is shown by the intersection of Sm and Dm1

with the equilibrium interest rate i1, in the short run. Which of the following options is

correct?

A. With an increase in real output, the demand for money will shift to Dm3 and the interest

rate falls to i3.

B. The shift of Dm1 to Dm2 creates an excess quantity of money demanded and people start

selling bonds. The price of bonds decreases which increases the interest rate.

C. When people decide to hold less money at any given interest rate, the price of bonds

decreases and the interest rate increases to i2.

D. The shift of Dm1 to Dm3 creates an excess quantity of money supplied in the money

market and people start selling bonds. The price of bonds decreases which increases the

interest rate.

E. A decrease in real output will not affect the demand for money and the interest rate

remains at i1.

MCQ 3

Initially all Commercial Banks have zero excess reserves, except Zee Bank which has the

following:

Excess reserves: R50000

Currency drain ratio: 60%

Desired reserves: 10%

What is the new initial value of Commercial Banks Deposits?

A. R 20 000

B. R 31 250

C. R 42 857

D. R45 000

E. R15 000

i Sm

Dm2

Dm3 Dm1

i1

i2

i3

Qmoney

MCQ 4

A decrease in the income tax rate can cause which of the following to occur?

(i) An increase in potential GDP

(ii) A decrease in the equilibrium level of labour

(iii) An increase in the equilibrium level of capital

(iv) A decrease in real GDP

(v) An increase in aggregate demand

A. Only (i) is correct

B. Only (i), (iii) and (v) are correct

C. Only (iii), (iv) and (v) are correct

D. Only (ii) and (iv) are correct

E. Only (iii) and (v) are correct

MCQ 5 Use the information in the table below to answer the following question (values are in

billions of Rands):

Monetary Base 60.8

Quantity of money 75.25

Desired currency holdings 34.65

The money multiplier is approximately:

A. 4.753

B. 8.367

C. 0.893

D. 1.238

E. -2.349

Macro tutorial 7 Chapters 28

Written question 1

In 2008, the South African economy experienced “excessively high inflation”. Most

economists believe this was due to high oil prices. Others believe it was a result of interest

rates that were kept too low.

Illustrate using the AD-AS model how (i) high oil prices and (ii) low interest rates can lead to

inflation. (Hint: do each case separately, each case requires about 1/3 of a page of writing).

MCQ 1

Suppose the monetary policy committee believes that the reason for high inflation is that they

set interest rates too low. Which of the following tools can the South African Reserve Bank

use to pursue a contractionary monetary policy?

(i) Selling bonds to the public

(ii) Increasing the required reserve ratio

(iii) Increasing the Repo rate

(iv) Increase government spending

A. only (i) and (iv) are correct


C. only (i), (ii) and (iii) are correct



MCQ 2

If inflation is high and actual real GDP is above potential real GDP, the South African

reserve Bank (SARB) should _______ the supply of reserves to the banking system; the

money supply curve will shift to the _______ ; the equilibrium interest rate will _______; the

quantity of loanable funds in the market will _______; and aggregate expenditure will

_______.

A. increase; left; increase; decrease; decrease

B. decrease; left; increase; decrease; increase

C. decrease; left; increase; decrease; decrease

D. decrease; right; decrease; increase; decrease

E. increase; right; decrease; increase; increase

MCQ 3

Suppose the SARB buys R100 million government securities in the open market. Which of

the following effects is/are associated with such an action?

(i) An increase in short run interest rates

(ii) An increase in the monetary base

(iii) A decrease in the long term real interest rate

(iv) A decrease in the supply of loanable funds

(v) An increase in investment

(vi) An increase in net exports

A. Only (i), (iv) and (v) are correct

B. Only (ii), (iii), (v) and (vi) are correct

C. Only (ii), (v) and (vi) are correct

D. Only (iii) and (vi) are correct

E. Only (i), (ii), (iii) and (v) are correct

MCQ 4

Given the scenario shown in the graph below, what would you recommend the Governor of

the South African Reserve Bank do so that she meets her mandate of maintaining price

stability?

A. Lower the bank rate and buy securities.

B. Raise the bank rate and buy securities.

C. Lower the bank rate and sell securities.

D. Raise the bank rate and sell securities.

E. None of the above.

MCQ 5

Assume the following situation in the South African economy:

The South African Reserve Bank (SARB) should ________ the supply of reserves to the

banking system; the money supply curve will shift to the________; the equilibrium interest

rate will ________ ; the quantity of loanable funds in the market will________ ; and

aggregate expenditure will _______ .

A. Increase; left; increase; decrease; decrease.

B. Decrease; left; increase; decrease; increase.

C. Decrease; right; increase; decrease; decrease.

D. Increase; right; increase; increase; decrease.

E. Increase; right; decrease; increase; increase.

SAS

AD

LASP

Real GDP

LAS

SAS

AD

P

Real GDP

Macro Tutorial 8 Chapter 29

Written question 1

Suppose current real GDP equals long-run potential real GDP and that the monetary policy

committee adopts an easy (i.e. expansionary) monetary policy believing it will increase real

GDP. Discuss the likely outcomes of such a policy. Use diagrams to illustrate your answer.

MCQ 1

Which of the following is/are correct?

(i) Fiscal policy has no effect on aggregate demand when the quantity of money

demanded is highly sensitive to the interest rate

(ii) For an economy that is at full employment, an increase in government

spending will completely crowd out investment

(iii) Fiscal policy has the largest effect on aggregate demand when expenditure is

completely insensitive to the interest rate

(iv) Monetary policy has the largest effect on aggregate demand when expenditure

is highly sensitive to the interest rate

(v) Monetary policy has no effect on aggregate demand when the quantity of

money demanded is completely insensitive to the interest rate

A. Only (i) and (iii) are correct

B. Only (i), (ii) and (iv) are correct

C. Only (ii), (iii) and (iv) are correct

D. Only (i), (iii) and (v) are correct

E. Only (ii), (iii) and (v) are correct

MCQ 2

Which one of the following statements is/are correct regarding the second round effects of a

contractionary fiscal policy?

(i) Money demand increases, which causes the interest rate to increase.

(ii) The decrease in output and subsequent change in money demand causes

people to buy more bonds. This causes the price of bonds to increase and

interest rates to decrease.

(iii) A decrease in the price level causes money supply to increase.

(iv) The decrease in the price level and the subsequent change in money supply

decreases interest sensitive expenditure.

(v) The overall interest rate increase is shown as a movement along the interest

sensitive expenditure curve.

A. Only (i) and (ii) are correct

B. Only (ii) and (iii) are correct

C. Only (iii) and (iv) are correct

D. Only (ii), (iii) and (iv) are correct

E. Only (ii), (iii) and (v) are correct

MCQ 3

Following an increase in government spending, the first round effects result in a shift of the

aggregate demand curve ________. The second round effects see ________ in the demand

for money which leads to ________ in the interest rate. This now shifts the aggregate demand

curve ________ as a result of the change in the interest rate.

A. rightwards, an increase, an increase, leftwards

A. leftwards, a decrease, a decrease, rightwards

B. rightwards, a decrease, an increase, leftwards

C. rightwards, a decrease, an increase, leftwards

E. rightwards, an increase, a decrease, leftwards

MCQ 4

All things equal, an expansionary monetary policy is most effective when:

A. The interest elasticity of aggregate spending is high and the interest elasticity of

money demand is high.

B. The interest elasticity of aggregate spending is high and the interest elasticity of

money demand is low.

C. The interest elasticity of aggregate spending is low and the interest elasticity of

money demand is low.

D. The interest elasticity of aggregate spending is low and the interest elasticity of

money demand is high.

E. None of the above.

MCQ 5

Suppose that the South African economy is in a recession. The SARB decides to use

monetary policy in an attempt to get the economy functioning at full employment. Under

which of the following economic conditions will this be the most effective:

A. Low responsiveness of expenditure to the interest rate and high responsiveness of the

quantity of money demanded to the interest rate

B. High responsiveness of expenditure to the interest rate and high responsiveness of the


C. Low responsiveness of expenditure to the interest rate and low responsiveness of the


D. High responsiveness of expenditure to the interest rate and low responsiveness of the


E. None of the above are correct

Macro tutorial 9 Chapter 29 app & 30

Written Questions 1

Suppose current real GDP is below long-run potential real GDP and that the monetary policy

committee adopts an easy monetary policy and the government increases spending. Discuss

the likely outcomes of such a policy. Use diagrams to illustrate your answer.

MCQ 1

The real interest rate is the nominal interest rate:

A. minus the inflation rate

B. minus the growth rate

C. plus the inflation rate

D. divided by the inflation rate

E. divided by growth rate

MCQ 2

When the annual inflation rate is higher than people have anticipated then:

A. fixed income earners benefit

B. debtors are hurt

C. flexible income receivers are more affected than any other group

D. creditors are harmed

E. savers benefit

MCQ 3

Which of the following statements is/are correct?

(i) The short-run Phillips curve shows that if inflation rises above its expected

rate, the unemployment rate falls below its natural rate.

(ii) The short-run Phillips curve shows that if inflation rises above its expected

rate, the unemployment rate rises above its natural rate.

(iii) The long run Phillips curve shows the relationship between inflation and

unemployment when the actual inflation rate equals the expected inflation rate.

(iv) A change in the natural rate of unemployment shifts the long run Phillips

curve but not the short-run Phillips curve.

A. Only options (i) and (iii) are correct.

B. Only options (ii) and (iii) are correct.

C. Only options (i) and (iv) are correct.

D. Only options (i), (iii) and (iv) are correct.

E. Only options (ii), (iii) and (iv) are correct.

MCQ 4

Consider the IS-LM model. A contractionary monetary policy action in conjunction with an

expansionary fiscal policy action will result in which of the following options?

A. A definite increase in the interest rate and a definite decrease in the equilibrium level

of output.

B. A definite increase in the interest rate and an indefinite change in the equilibrium

level of output.

C. A definite decrease in the interest rate and an indefinite change in the equilibrium

level of output.

D. A definite decrease in the interest rate and a definite increase in the equilibrium level

of output.

E. An indefinite change in the interest rate and an indefinite change in the equilibrium

level of output.

MCQ 5

This year, while the government has increased lump sum taxes and expenditure on education,

the actions of COSATU have resulted in the wages of nurses and teachers rising. In the Gulf

of Mexico, BP’s oil rig exploded, causing transport and food prices to rise. Which of the

following statements is/are true?

(i) Higher wages and increased transport costs will likely cause cost-push

inflation.

(ii) Higher wages and increased lump sum taxes will likely cause cost-push

inflation.

(iii) Increased transport costs and increased government expenditure by

government will likely cause demand-pull inflation.

(iv) Increased government spending on education in conjunction with increased

lump sum taxes will likely cause demand-pull inflation.

A. Only (i) is correct.


B. Only (i) and (iv) are correct.

C. Only (ii) and (iv) are correct.

E. Only (ii) and (iii) are correct.

Macro tutorial 10 Chapter 30 & 33

Written question 1

South Africa currently adopts a flexible exchange rate policy whereas China adopts a fixed

exchange rate. List 3 advantages and 3 disadvantages of each and briefly (3 – 5 sentences)

explain why South Africa adopts a flexible exchange rate policy.

Written question 2

Apple has recently launched the iPhone 4. South African consumers have a choice of either

purchasing the phone locally or directly from the USA. Suppose the following:

Price of iPhone 4 in USA: $300

Price of iPhone 4 in SA: R2700

Current exchange rate: R8/$

Does purchasing power parity (PPP) hold? If not, fully explain the transmission mechanism

that leads to PPP. (The USA price includes all costs such as transportation, exchange rate fees

etc.)

MCQ 1

Use the following diagram to answer the following question. It shows the Rand price of 1

Dollar.

American consumers discover that Mrs Ball’s Chutney is tastier than Heinz Ketchup. When

they import more of Mrs Ball’s Chutney from South Africa, then under a flexible exchange

rate regime:

A. the demand for Dollars increases and the Rand depreciates.

B. the supply of Dollars increases and the Rand appreciates.

C. the demand for Dollars decreases and the Rand appreciates.

D. the supply of Dollars decreases and the Rand depreciates.

E. nothing, because the flexible exchange rate prevents the change in the exchange rate.

MCQ 2

S$

Quantity of Dollars

D$

Rand per

Dollar

e

Assume that a calculator costs R56 in South Africa and $7 in the United States. If the

exchange rate is R6/Dollar ($) and purchasing power parity does not prevail then:

(i) People will sell Rands on the foreign exchange market and the value of the

Rand will fall.

(ii) People will sell Dollars on the foreign exchange market and the value of the Rand

will fall.

(iii) People will buy Dollars on the foreign exchange market and the value of the

Dollar will rise.

(iv) People will buy Rands on the foreign exchange market and the value of the Rand

will rise.

(v) People will buy Rands on the foreign exchange market and the value of the

Dollar will rise.

A. Only (i) and (iii) are correct.

B. Only (ii) and (iv) are correct.

C. Only (i) is correct.

D. Only (iv) and (v) is correct.

E. Only (ii), (iii) and (v) are correct.

MCQ 3

Near the end of 2008, the Rand to Euro exchange rate was almost R14/euro. Assuming that

South Africa and the EU are the only two areas in the world and that the exchange rate is now

R10/Euro, we can say that:

(i) the rand has depreciated since 2008.

(ii) the rand has increased in value since 2008.

(iii) the quantity of rands that people plan to buy in the foreign market has increased

from 2008.

(iv) the quantity of euro that people plan to sell in the foreign market has increased

from 2008.

(v) the quantity of South African goods exported has decreased since 2008 as a result

of the change in the exchange rate.


B. Only (ii), (iii), (iv) and (v) are correct.

C. Only (ii) and (v) are correct.

D. Only (i) and (v) are correct.

E. All of the above are correct.

MCQ 4

Which of the following best describes a policy moving the economy to the left along a short-

run Phillips curve?

A. A contractionary monetary policy designed to reduce inflation

B. An expansionary monetary policy designed to reduce inflation

C. An expansionary monetary policy designed to reduce unemployment

D. A contractionary monetary policy designed to reduce unemployment

E. None of the above options is/are correct

MCQ 5

An increase in South Africa’s interest rates will most likely lead to the following:

A. A reduction in the demand for South Africa’s goods and services in the international

market

B. An increase in the demand for other currencies besides the Rand in the foreign

exchange market

C. A depreciation of the South African Rand

D. An increase in exports by South Africa

E. An increase in the supply of the Rand in the foreign exchange market

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